22 corporate recovery


Make incentives work efficiently for everyone


Modern performance and incentive schemes provide far more than cash rewards – if astutely developed, then efficiently and effectively managed. Such schemes are increasingly significant as business tools to help manage issues such as staff retention, governance transparency, corporate image, shareholder confidence and strategic operational objectives, writes John Burbedge


But, one traditional business adage remains constant in any successful scheme – make things simple so that everyone understands.


“Some long-term incentive (LTI) plans become so complicated that participants, including managers, don‘t know how the incentive works. What gets paid to participants can often be one or two steps removed from the input that they actually make to the business,“ explained Reading- based PwC partner Julian Sansum, who specialises in executive reward schemes.


“Some plans can look very appealing to shareholders and the remuneration committee, but in practice they can reward market volatility rather than real performance.


right behaviour.“


And, the rewards – whether cash, shares, time or alternatives – need to have a relevant and recognised value for the recipient if they are to achieve a motivational objective.


“One executive who PwC surveyed* said she considered the value of her share option allocations in the same way as a company lottery ticket,“ said Sansum.


Clearly, for this executive, an immediate reward for her successful effort would motivate far more than the promise of share gains in the future. Or would it? Maybe she‘s among the 28% of executives prepared to gamble on a higher share- based bonus later instead of a lower cash reward now.


The key insight, said Sansum, is that everyone is different and reward schemes need to be designed carefully to be relevant to the people whose behaviour they are meant to influence.


While bespoke tailoring is desirable, complexity is not.


In today‘s fast-changing


business world, where talent is global and a job-for-life is history, some LTI plans have become complex and increasingly irrelevant to employees, who perceive the value of deferred payments dropping on average by around 50% over three years.


Sansum advises the implementation of solutions that will be simply understood,


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yet designed by professionals who will take into account factors ranging from internal salary fairness to external public perception, HMRC tax implications to employee psychology and global aspirational differences.


For example, within multinational organisations, executives in the US and BRIC countries tend to favour share-based rewards, whereas cash is favoured in Europe.


“We have to be very careful that we don‘t design an incentive plan that only appeals to the CEO or senior people, who tend to be financially secure, and more willing to risk some of their wealth.“


Incentives need to drive the


But, the alignment of appropriate reward to true performance is not solely a financial equation.


Strategic factors such as a corporate desire to show greater social responsibility can lead to incentive packages that include childcare, flexible hours, or even time-off to help charitable causes.


“Many companies today like to feel that all employees participate in something linked to the company.“


And, by equably sharing the overall value delivered by good performance, incentive schemes help build company morale and loyalty, which can promote organic growth.


“In the current austerity climate of low pay rises, businesses might as well help to control fixed costs by focusing their pay-pot on future performance.


“Ten years ago many companies had similar one-size-fits-all LTI structures, that frankly didn‘t work for everyone. Now companies are developing specific incentive plans that work strategically for their businesses.“


Drivers of this change include greater shareholder scrutiny of corporate remuneration and incentive planning and the PR need for boards to demonstrate cohesion between performance and reward. Sector skills shortages and HMRC activity on tax transparency are also catalysts.


PwC works closely with HMRC to assure that corporate incentive plans are compliant, while tax efficient for clients, says Sansum.


THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – JULY/AUGUST 2013


Julian Sansum


“There are particular arrangements for small and growing companies around enterprise management incentives and entrepreneurs‘ relief. Awards made under these rules can be very tax efficient, while remunerating employees for their participation in an improved business performance.


“HMRC-approved share plans also tend to be efficient. They fall within the CGT tax regime, but some people on relatively low earnings, may pay no CGT at all.


“Employees in a company share scheme such as those offered by private equity backed companies can make significant gains if they go up in value. The gains are subject to CGT, but typically at a lower rate than income tax.


“Employees usually have to spend their own money buying into those shares, so in effect they are backing themselves and the skills, talent and performance of their colleagues.


“Of course, there is a risk with share-related plans, because shares can go up or down. Strangely, the mainstream media always seems keen to publicise the gains of senior executives, but not so the losses.“


*Factual details from PwC global study ‘Making executive pay work.‘


Details: Julian Sansum 07919-057454 www.pwc.co.uk


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